Assessment of the Market Impact of the BBC’s New Digital TV and Radio Services An analysis by Ofcom, conducted as an input into the independent reviews of the BBC’s new digital TV and radio services 13 October 2004 Assessment of the market impact of the BBC’s new digital TV and radio services Contents 1. Introduction - 3 - 2. Summary of market impact - 4 - 3. Market overview - 8 - 4. Our approach - 19 - 5. The benefits of digital broadcasting - 27 - 6. Risks to competition in certain niche markets - 33 - 7. Conclusions - 48 - A Analysis of O&O’s market impact assessment - 50 - - 2 - Assessment of the market impact of the BBC’s new digital TV and radio services 1. Introduction 1.1 In the last licence fee settlement in February 2000 Chris Smith, the then Secretary of State for Culture, Media and Sport (‘Secretary of State’) said the BBC should “provide a strong and distinctive schedule of benchmark quality programmes on all its services and should drive the take-up of new digital and on-line services”. 1.2 By the end of 2002, the BBC had, as part of its response, launched five new digital radio services (the radio stations 1Xtra, BBC 6, BBC 7, BBC Asian Network and Five Live Sports Extra) and four new digital TV services (the channels BBC 3, BBC 4, CBeebies and CBBC). 1.3 In April 2004, the Secretary of State commissioned two independent reviews – one of the BBC's digital TV services (led by Professor Patrick Barwise) and the other of the BBC’s digital radio services (led by Tim Gardam). As part of this periodic assessment, the Secretary of State asked the Office of Communications (‘Ofcom’) to assist by providing an independent technical assessment of the market impact of the BBC’s new digital services. 1.4 Ofcom was subsequently asked by Professor Patrick Barwise to assist by providing data on whether the BBC’s new services are meeting their remits and the conditions imposed upon them by the Secretary of State at approval. This data was supplied to Professor Barwise separately and is not otherwise referred to in this report. 1.5 Our approach has been to assess the impact of the BBC’s new services on the overall structure of the market and on the specific segments in which these new services may be having a significant impact on competition and innovation. Reckon LLP consultants assisted with the development and application of this approach. 1.6 As part of our assessment we have independently reviewed the BBC’s own market impact analysis (undertaken for the BBC by consultants Oliver & Ohlbaum Associates) by assessing its sensitivity to changes in the assumptions which underpin it. This sensitivity analysis was undertaken with the assistance of Spectrum Strategy Consultants. - 3 - Assessment of the market impact of the BBC’s new digital TV and radio services 2. Summary of market impact 2.1 We have examined the impact of the BBC’s new services from two perspectives:1 • an overview of the effect of the new services on the overall market – i.e. the impact on developments in market structure and competition. In particular, we look at the impact of digital take-up on the effectiveness of competition in the broadcasting sector and the extent to which the BBC is contributing to these changes. • a closer look at specific impacts where competition or innovation may be threatened by the presence of the BBC – i.e. the impact on the finances and business models of specific commercial operators and the implications of these effects for competition. The BBC’s own quantification of the monetary impact of BBC’s new services on their rivals provides an important input to this analysis. Overall impact 2.2 On the positive side, the BBC’s new services have contributed to digital uptake, in both television (‘TV’) and radio, although the scale of the contribution may have been over- stated in the analysis presented by the BBC. Digital broadcasting helps the emergence of more effective competition in the broadcasting market. This tends to deliver more benefits for both consumers and citizens. 2.3 In digital TV, the BBC’s main overall impact has been via its involvement in Freeview. By backing and cross promoting digital terrestrial TV (‘DTT’) and enhancing its offering with attractive new services, the BBC has been central to DTT’s recent success. In turn, the success of Freeview is: • likely to increase inter-platform competition;2 • may increase commercial revenues (as commercial advertising revenues have risen for digital only channels and more households have been drawn into the pay TV market). Over time, increased competition is likely to bring dynamic benefits to consumers in the form of greater innovation and choice. 2.4 The main contribution made by the BBC’s new services to the emergence of digital radio has been both through DTT (i.e. many households access the digital radio available on Freeview) and via digital audio broadcasting (‘DAB’). The BBC has worked closely with the commercial sector, in particular through the Digital Radio Development Bureau (‘DRDB’), to raise awareness of DAB and nurture its early growth. As with digital TV, the BBC’s engagement with digital radio has helped grow the market and enabled the emergence of greater competition and more opportunities for commercial operators.3 2.5 However, there are potentially significant costs associated with the BBC’s activities. There is a real risk that the BBC’s involvement in some market segments may leave insufficient revenues4 for commercial operators wishing to supply those segments now or in future. 1 We have not assessed the justification for BBC intervention in the market nor have we assessed the merits of digital switchover. These issues are considered in detail in our PSB review and our digital switchover report respectively. This means we have not weighed all the costs of BBC intervention (e.g. whether the BBC new services are good value for money) against all the benefits (e.g. the direct value to consumers arising from the distinctiveness of the BBC new services). We have focused on the impact of the BBC’s new services on the competitive process and hence on market outcomes. This analysis provides insights on a subset of the costs and benefits which have been considered by the independent reviews. See Section 4 for our approach. 2 Although by favouring the platform with least capacity (i.e. DTT) it is not certain that the impact on competition between services will be positive. Also, by promoting DTT, the BBC might impact on the competitive position of other platforms. Finally, in this market impact analysis we have focused on the effect of the BBC’s new services on competition. We have not looked at the distinctiveness of the new services or at the efficiency with which they have been supplied. See Section 4 for more on our approach. 3 For instance, digital radio leads to better segmentation of the market and more efficient extraction of advertising revenues. 4 In other words, the BBC’s presence may leave insufficient audience or may reduce consumers’ willingness to such a level that there are inadequate revenues for commercial competitors to continue to supply the market segment. - 4 - Assessment of the market impact of the BBC’s new digital TV and radio services Also, uncertainty about the future strategy of the BBC’s new services may exacerbate the risks associated with new market entry or content innovation, by extending the range of services over which commercial operators may face competition from the BBC in future. Combined with the BBC’s large budgets and relatively loose remits this may, in time, diminish overall levels of competition, investment and innovation. Specific impacts 2.6 It is difficult to quantify the precise impact of the BBC’s new services on the overall competitive environment or, indeed, to separate out the impact of the new services from that of the BBC’s overall support for digital TV and radio. The BBC’s own assessment was carried out by consultants Oliver & Ohlbaum Associates (‘O&O’) and focused on the question of how much commercial revenues have increased or declined as a result of the presence of the new BBC services in the market.5 O&O estimated that the total impact on commercial TV revenues was between -£3.3m p.a. and -£31.1m p.a. while the impact on radio was +£2.9m p.a. 2.7 We reviewed this analysis with Spectrum Strategy Consultants (“Spectrum”). Spectrum provided a revised market impact assessment which tested the sensitivity of O&O’s results to the assumptions they used. More specifically, Spectrum calculated revised estimates by applying different (but plausible) assumptions to the O&O methodology to see how much the results changed. 2.8 We found that: • The results from the type of approach used by O&O tend to be assumption driven. In other words, findings about the extent of the revenue impact of the BBC new services depend on the assumptions made in the analysis. • Results from this type of analysis tend to be highly sensitive to assumption changes. When plausible adjustments were made to some of O&O’s key assumptions, Spectrum found that the impact on commercial rivals changed from being positive to negative. In TV, adjusting key underlying assumptions increases the total cost to commercial channels by over 50 per cent. In radio, adjusting one key assumption changes the total impact from slightly positive to a negative. • Two assumptions have a potentially significant effect. First, we consider it highly unlikely that Freeview will afford channels any significant leverage in their negotiations with Sky over subscription fees.